If you were unfamiliar with Cathie Wood and the ARK family of funds before the onset of the pandemic, you’re not alone. The ARK Innovation ETF (ARKK)closed 2019 with a mere $1.9 billion AUM, but that number skyrocketed to nearly $28 billion in February of 2021, when the fund and ARKK stocks all peaked.
Cash inflows aside, the fund generated a 300% return in just 11 months, far outpacing the returns of the S&P 500 (71.6%) and the Nasdaq (104.9%) over the same period. As you’re undoubtedly aware, however, the equity bear market we’re in now began with the hyper-growth tech stocks that the fund specializes in – disruptive innovation-focused companies in “DNA Technologies … Automation, Robotics, and Energy Storage … Artificial Intelligence and the ‘Next Generation Internet’ [and] Fintech Innovation.”
Since that February 2021 peak, ARKK has given it all back and closed Monday near its pandemic lows. The Nasdaq is down about 29% YTD, but ARKK stocks are down almost double that (the fund’s current holdings are down an average of 56% YTD).
Right now, equity markets are, to put it charitably, not great. But the rapid reversal in ARKK stocks led me to wonder whether some perfectly good babies had been thrown out with the proverbial bathwater.
Current ARKK Stocks
|ZM||ZOOM VIDEO COMMUNICATIONS-A||$921,236,309.64||10.08%||-38.23%||8.7|
|PATH||UIPATH INC - CLASS A||$474,402,524.16||5.19%||-53.41%||12.04|
|CRSP||CRISPR THERAPEUTICS AG||$470,713,216.80||5.15%||-20.44%||5.72|
|TDOC||TELADOC HEALTH INC||$430,494,590.44||4.71%||-63.19%||2.78|
|EXAS||EXACT SCIENCES CORP||$418,987,352.70||4.58%||-48.91%||4.11|
|TWLO||TWILIO INC - A||$357,951,522.50||3.92%||-64.84%||5.52|
|NTLA||INTELLIA THERAPEUTICS INC||$353,201,697.60||3.86%||-56.51%||102.66|
Of those stocks, only four are currently profitable (ZM, TSLA, ROKU, CRSP; P/E ratios from 16-95) although all of them are rated Hold or better (on average) by analysts and seven carry price targets more than double where they trade now.
The exceptions are ZM, TSLA and PATH which have average price targets of 170, 917 and 29, respectively.
As you can see from the table above, all 10 of the ARKK stocks trade at reasonable price/sales ratios (the S&P 500 has an average price/sales ratio of 3), with the exception of Intellia Therapeutics (NTLA), which trades at 100x sales. Undeniably high, but not unheard of for a biopharma developer (often generate limited or no sales during R&D).
So that would appear to leave us with a group of significantly discounted stocks trading at reasonable valuations, all rated Hold or better by sell-side analysts with price targets implying 50-100% upside.
2 ARKK Stocks for the Long Term
In researching this article, however, two stocks stood out based on future growth expectations. Both Exact Sciences (EXAS) and Twilio (TWLO) are projected to have triple-digit (or near triple-digit) growth rates annually for the next five years, with the important caveat that they’re both projected to contract this year.
ARKK stocks (and the fund itself) are undoubtedly in the midst of downtrends and buying any of them will have you trying to catch a falling knife. If your time horizon is long enough (years, not months) and you believe in disruptive innovation, you could make a reasonable case for dollar cost averaging into the fund over time. Alternatively, you could buy partial positions in EXAS and TWLO based on future growth projections.
But there’s a better choice. Unlike Cathie Wood, you don’t have to be invested. ARKK is intended to be at least 65% invested at all times during normal market conditions, even a bear market. The fund is minimally invested in companies that tick the boxes of its prospectus because it has to be.
Cabot’s growth guru, Mike Cintolo, has no such obligations, and his subscribers have successfully avoided most of the pain that ARKK has suffered because readers of Cabot Growth Investor moved heavily to cash at the beginning of the bear market.
Rather than force a trade in these beaten-down ARKK stocks, I’m inclined to wait for a green light from Mike – one of the best market timers in the industry, as recognized almost annually by Timer Digest – before making my next buys. And if you want to invest alongside Mike – and be the first to know when he gives that green light – simply click here.
Do you still own any ARKK stocks in your portfolio? Which ones? Tell us about them in the comments below.